Crypto no fad but staying power hinges on fixing basic issues

CHICAGO • Cryptocurrencies made a giant leap this year.

Wall Street strengthened its embrace, with Morgan Stanley chief executive officer James Gorman declaring it no fad. New York Mayor-elect Eric Adams said he will initially get paid in Bitcoin.

And token mania invaded pop culture - from sports and entertainment to gaming and high-end auctions.

Yet the industry often failed to get the basics right, still plagued by the same problems that have dogged it from the start: trading glitches, infrastructure issues, hacks and other crypto weirdness.

Back when digital tokens fetched a pittance, this could be dismissed as a silly sideshow.

Now, cryptocurrencies are worth real money - more than US$2 trillion (S$2.7 trillion) - and their backers want to overtake traditional finance and revolutionise much more.

But their ability to do so - and crypto's staying power - may hinge on addressing and fixing basic plumbing and security issues.

The industry uses "the Facebook model of 'move fast and break things'", said Mr Larry Tabb, head of market structure research at Bloomberg Intelligence. "There's no regulatory push to solve these problems, so it just becomes more of an issue of competition. If I get fed up with one exchange, I'll switch to some other player."

Crypto believers argue that snags are to be expected in an industry that is still in its early days. It will find its footing, they say.

Perhaps. Nevertheless, there sure were a tonne of major screw-ups this year.

Just this month, CoinMarketCap, a go-to source for crypto prices, spewed out incredibly wrong data for the entire market. Bitcoin prices exceeding US$800 billion were displayed on its website, which valued all tokens in circulation at US$15 quintillion.

The company, owned by digital-asset exchange Binance, responded in typical crypto fashion - with glib, meme-filled tweets. "How did it feel to be a trillionaire for a couple hours?" read one, followed by the tears-of-joy emoji. Some industry-watchers were not as sanguine in their response.

While the CoinMarketCap incident did not appear to hurt anyone much, that was not the case in other instances.

Some mistakes sparked declines in Bitcoin, a situation compounded by the fact that automatic safety features - like the US stock market's circuit breakers - are not common in crypto. In October, a trader's algo went haywire, sending the world's biggest cryptocurrency down about 87 per cent before it shot back up.

Then there were moments when the blockchain infrastructure that powers crypto posed problems. Solana emerged this year as a competitor to Ethereum, which is effectively a global supercomputer running software called smart contracts. But Solana broke for 17 hours in September, crippling a small but growing corner of decentralised finance, or DeFi.

Other asset classes have also been ensnared in technology drama over the years. For instance, squirrels caused power outages that took down Nasdaq's market in 1987 and 1994. The 2010 flash crash, in which the whole US stock market dove to a trillion-dollar loss in minutes, badly spooked Wall Street.

Since a 3½-hour New York Stock Exchange outage in 2015, though, it has been mostly smooth sailing for equities-market infrastructure, evidence that a US Securities and Exchange Commission crackdown got traders and exchanges to make their software more resilient.

Crypto has much less oversight, meaning the industry mostly gets to decide what, if any, safeguards to implement.

Many Wall Streeters are now flocking there, bringing with them conventional ideas about protections. But the space was initially forged mostly by people without professional finance experience who may not have fully appreciated what it takes to build systems that can handle fast-paced modern trading.

Hacks are also a big problem in crypto, which is deeply connected to the Internet - making it vulnerable.

Money gets drained from projects all the time. Hackers stole about US$130 million from BadgerDAO earlier this month, while customers of crypto exchange BitMart lost about US$150 million.

Crypto culture is simply different from traditional finance, so some weird stuff is inevitable. Take the US$532 million non-fungible token trade that took place this year - or appeared to take place but really did not since the buyer and the seller were the same person. Except for trading fees, no money changed hands, meaning all the pseudo-transaction really did was draw attention to the NFT market.

And then there was the person who mistakenly sold a Bored Ape Yacht Club NFT for roughly 100 times less than intended - for US$3,066 instead of about US$300,000 - because of a typo. In the stock market, that might have been blocked by something called a fat-finger check, which aims to prevent erroneous keystrokes from causing mistaken trades.

Much of crypto is built on the idea of no take-backs - once a transaction happens on a blockchain, it is supposed to be a done deal. So the passwords protecting Bitcoin and other crypto assets have to be guarded carefully.

And do not lose track of them: Some digital tokens are literally lost in garbage dumps, on mouldering hard drives. That raises a question: Is that too much to expect of crypto holdouts, creating a big hurdle to mainstream adoption?

BLOOMBERG